Formula for rebooting commercial relations

March 24 2009

RBTH

Anders Aslund, Andrew Kuchins, The Moscow Times

As the horrendous effects of the global economic crisis sink in, it should be a signal to both Washington and Moscow to move toward more productive relations without any illusions of shared values. There is no reason why U.S.-Russia relations shouldn't improve under Presidents Barack Obama and Dmitry Medvedev.

There are many areas of mutual interest. In a much-noticed speech in Munich on Feb. 7, Vice President Joseph Biden set the line of the Obama administration: "It is time to press the reset button and to revisit the many areas where we can and should work together." He also stated that "the United States and Russia can disagree and still work together where our interests coincide." One of the most obvious areas of common interest has been ordinary commerce between the United States and Russia. This sphere has been largely neglected in recent years.

U.S. engagement with Russia on economic integration presents an opportunity to broaden and deepen the bilateral relationship. Economic cooperation will build goodwill and confidence, which can facilitate discussion of other areas such as cooperation on nonproliferation and dealing with Iran's nuclear program. Yet the two countries' very limited mutual trade and investment — the United States accounts for only 4 percent of Russian trade and foreign direct investment — indicate a very significant potential to expand bilateral economic relations to the benefit of both sides.

One reason direct U.S. investment in the Russian economy is so small is that the United States does not have a ratified bilateral investment treaty, or BIT, with Russia. Moscow has BIT agreements in place with 38 other nations representing most of the major global economies and most members of the European Union. As a consequence, U.S. corporations usually invest in Russia through European subsidiaries that enjoy better legal protection. Russia has clearly indicated that it welcomes such an agreement, and it was included in the U.S.-Russia Strategic Framework Declaration, which then-Presidents George W. Bush and Vladimir Putin signed in Sochi in April.

A BIT would also encourage Russian investment in the United States. Foreign investment not only provides jobs for Americans but it also "foster[s] economic interdependence," as Yale professor of economics Aleh Tsyvinski wrote in The Moscow Times on Oct. 23. "By investing in U.S. and European assets," Tsyvinski said, "Russia's government and business elites are buying a stake in the global economy. This should bring better mutual understanding and a more rational and accountable foreign policy." The United States must work with Russia to ensure that openness to foreign investment is reciprocal and that legal protections for investors are guaranteed.

A crucial issue in Russia's standing in world commerce is its accession to the World Trade Organization. It is the largest economy that remains outside the WTO. The United States has consistently favored Russia's membership in the WTO as well as in other international economic institutions because this type of integration would not only boost commerce but also promote rule-based international norms of economic behavior in Russia and thus help influence Kremlin policy in a constructive direction. The United States should continue to support Russia's WTO accession and work toward resolving the objections coming from both Moscow and the trade organization.

Russia is already an active and responsible board member of the International Monetary Fund and the World Bank. In 2007, Russia showed positive engagement by proposing its own highly respected candidate for managing director of the IMF. Economic integration will provide additional opportunities for the Russian leadership to further develop its global engagement.

In addition, Russia has been a full member of the Group of Eight since 1997, although the financial G7 group still formally excludes Russia. The Obama administration should follow the recent lead of the Bush administration and devote more attention and resources to developing the G20, which was created by the administration of Bill Clinton in 1998, rather than the G8, which seems increasingly economically irrelevant and a vestige of Cold War international institutional arrangements. Russia shares this view.

In his October speech in Evian, France, Medvedev expressed a strong interest in reforming the anachronistic system of global financial governance. Although Russian proposals have not been very concrete, such efforts should be welcomed, even if its views may sometimes conflict with those of the United States.

Russian accession to the Organization for Economic Cooperation and Development is also important. Like the WTO, the OECD is a highly legalistic organization that requires new members to adopt many rules before they are granted entry. Membership requires obligations such as observance of international standards relating to rule of law, transparency and property rights, all of which must be adopted in coordination with other members — in particular, our close European allies.

Another roadblock is the Jackson-Vanik amendment, which requires the executive branch to certify to Congress annually that there are no restrictions on the emigration of Jews from Russia. This Cold War holdover no longer serves any useful purpose, and the Obama administration and Congress should finally bury this relic, which would facilitate Russia's entry into the WTO.

The United States and Russia signed in April the "123 Agreement" on civilian nuclear cooperation, which could be of great commercial significance. The Senate was ready to ratify the agreement in the fall, but the Bush administration withdrew it after the Russia-Georgia war. When appropriate, this treaty should be ratified.

The United States should increase export support and trade facilitation for U.S. companies interested in the Russian market. The Exim Bank and Overseas Private Investment Corporation exist for these purposes, but they should receive more support, especially during the current crisis. The United States should also deepen bilateral economic dialogue involving government and business at all levels, building on the U.S.-Russia Economic Dialogue, which was initiated in April.

The U.S.-Russia commercial relationship can and should be much more productive.

Anders Aslund is a senior fellow at the Peterson Institute for International Economics, and Andrew Kuchins is a senior fellow and director of the Russia and Eurasia Program at the Center for Strategic and International Studies. They are co-authors of "The Russia Balance Sheet," which will be published in April.